Focused on asset pricing, this dissertation adds to the literature two essays with emphases on both theory and empirical findings. The first essay shows that in tests of basic theoretical asset-pricing models with risk-free rates, the cross-sectional estimates of the market risk premia generated by the widely-used with-intercept regressions can be much less efficient than those generated by the no-intercept regressions. Empirical testing results using both actual and simulated data demonstrate that the biases in the market risk premium estimates produced by with-intercept regressions can be severe enough to yield incorrect inference about the examined theoretical models.
From the optimal behavior of arbitrary number of consumer-investors who act so as to maximize their life-time utility of consumption and leisure, the second essay derives a continuous-time intertemporal asset pricing model with stochastic human capital, leisure, consumption, and investment opportunities. The model is presented in two forms: one is based on market and human capital and the other on consumption and leisure. The first form advances Merton's ICAPM with the aggregate growth of human wealth identified as an investment opportunity variable. The second form can be viewed as a generalization to Breeden's CICAPM with the growth rate of the leisure-augmented consumption being the sole pricing kernel. Explicit demand functions for assets are derived and it is shown that, with heterogeneous human capital, the classic fund separation results may no longer hold. The human capital is modeled to include not only its marketed benefits but also its non-marketed benefits by the use of aggregate labor income and three macro variables in labor statistics: the average weekly employment hours, the unemployment rate, and the labor participation rate. Three flexibility parameters are introduced to explicitly account for the hidden unemployment, the self-employment, and the time spent on job-related activity such as work-commute and so on. Although a formal and comprehensive test is left as a future research task, two pieces of evidence are provided. First, a quick revisit to the equity premium puzzle shows that my model is plausible to explain the observed equity premium with the actual data. Then a preliminary test using returns of the 25 Fama-French size B/M portfolios shows that my model captures about 75\% of the total variation in the cross-sectional returns and that the unemployment rate plays a critical role in explaining the cross-sectional returns.
|Commitee:||Hwang, Min, Jostova, Gergana, Van Order, Robert, Wilson, Arthur J.|
|School:||The George Washington University|
|School Location:||United States -- District of Columbia|
|Source:||DAI-A 73/12(E), Dissertation Abstracts International|
|Subjects:||Finance, Economics, Economic theory|
|Keywords:||Asset pricing, Consumption, Human capital, ICAPM, Leisure, Unemployment rate|
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